The Federal Reserve stands at a vital crossroad for the US economy as it tries to navigate its path through the prevailing market fear and the current, dysfunctional state of the US government. However, one thing remains clear by the Fed: rate hikes and monetary tightening will be gradual during the ongoing year. After the Federal Reserve increased interest rates by a quarter basis point last December, they had decreased their projections of three separate hikes in 2019 to two hikes, giving investors a bit of optimism moving into 2019. While two hikes may seem like the Federal Reserve is suggesting a surging US economy for the years to come, businesses and investors must be cautious from blindly forming any concrete conclusion during these volatile times. In the end, Powell and the Fed should not be seen as stingy critics of the US economy who fail to see the needs of businesses– rather, they see a clear trajectory of ‘chipping growth’ and have done an amazing job to keep the U.S economy intact.
During an interview in November of the previous year, Mr. Powell claimed he was ‘quite happy’ with the current U.S economy and added that the Fed deserved significant credit for keeping the U.S economy in track for delivering steady and sustainable growth. Unlike some madmen roaming Wall Street and Congress, Mr.Powell is a proper economist who understands the difference between too much growth and too little– both of which kill the national economy and drives a nation down the dumps of financial crisis. Too much growth by central banks and the national government by decreasing limitations in lending leads to increased spending in the economy by businesses and consumers.
Although higher consumption is a healthy precedent to a roaring economy, it leads to a national accumulation of debt on all scales; this money needs to be paid with interest at some time. Thus, an inflated economy might have businesses posting wildly high growth margins in one quarter and filing for bankruptcy five quarters later due to an outrageous accumulation of toxic debt. In the midst of excessive lending, everyone loses. Businesses are forced to cut their workforces and banks lose money on toxic debt. On the other end of the spectrum is too little expansion. With little expansion, the markets and the national economy risk foreign capital leaving the economy for higher returns elsewhere, and inflation starts to become a problem and eat into the economy. As a result, Mr. Powell’s median view is the ideal view that will guarantee a sustained period of US economic growth. U.S businesses and the U.S government have burned heaps of cash within the past few years, and the Fed has to tighten lending slightly and slowly to ensure that this debt gets paid.
Adding to that, Mr.Powell had cautioned of ‘chipping growth’ margins from the latter part of 2018, and he stands corrected. In spite of greater than 75% of listed U.S businesses reporting earnings above expectations, earnings growth has slowed to its slowest pace since later 2017(13%), when the national government first rolled out the large corporate tax breaks. In addition, a greater proportion of U.S businesses posted total revenues below expectations. Thus, the higher final earnings posted by U.S businesses is not only due to expansion but also the corporate cost-cutting benefits offered by the current government. And as unfortunate as it may be, the national government cannot forever continue to stimulate businesses in this fashion– it is simply too capital intensive, burning holes into the government’s wallet. The lower than expected earnings may also suggest declining growth of consumer consumption, which is unlike an economy that is roaring. Now, it is important to realize that the US economy has not dived into a recession right now but is still enjoying better than expected growth that is decreasing quarter to quarter. These declines in margins from quarter to quarter will be gradual, and the Fed should be at the forefront of it as it will strive to continue slightly tightening lending so as not to overheat the economy (like the administration did back in 2017).
Due to the ongoing government shutdown, various government economic agencies in charge of compiling data for GDP growth, lending and consumption figures are not able to operate. Thus, it is very unlikely that the Fed will outline a solid plan in the Federal Reserve Bank meeting this month. However, expect neither superior optimism or pessimism about the economy. A concrete decision by the Fed, according to many analysts, is likely to come about some time in the middle of this year, after it has observed about two-quarters of revenue. For now, it is advisable to pay attention to margins of the Big Techs, which have led gains in the markets since the start of this administration. A decrease in their margins is indicative of a slowing economy.Till then, there’s no telling to what the madness in Congress will give rise to and how the markets will react.